Magazine

Staying On Track With Your Financial Goals

By Sylvia Kwan

January 17, 2018

What is investing to you? A) a means to an end or B) an end in itself?

At Ellevest, our answer would be A. We see investing as a way to help you accomplish your specific, real-life financial goals. This includes goals you might already be saving for but may not have ever considered investing toward, such as buying a home or raising kids.

We see investing as a way to help you accomplish your specific, real-life financial goals.

It’s why our approach is called goal-based investing. This isn’t the same as investing, which focuses purely on investment returns and thus isn’t specifically directed toward helping you achieve the future you’ve envisioned. And this difference in investment philosophies means that the old ways of measuring investing success aren’t particularly relevant when you’re evaluating your Ellevest investment portfolio.

The standard of measuring performance in terms of “beating the market” sounds thrilling, but this can’t actually tell you whether or not you’re making meaningful progress toward reaching your financial goals. Here’s what we believe is helpful when you’re looking at your Ellevest portfolio for a sense of how you’re doing.

Different Investment Portfolios, Different Performances

Each of your personalized portfolios is carefully constructed based on a combination of factors: your goal, gender, salary, how you’ve prioritized the goal, and your goal timeline. All of this information helps determine your investment portfolio’s asset allocation — that’s the mix of exchange-traded funds (ETFs) we choose for you and the percentage of your investment portfolio that we invest in each one.

If you’re an Ellevest client, you’ve probably noticed differences between, let’s say, the portfolio for your retirement goal versus the portfolio for your start-a-business goal. Perhaps one is up more than the other, or you have a non-Ellevest portfolio that’s outperforming your Ellevest portfolio or vice versa.

These differences in investment performance stem from each of your Ellevest portfolios having a specific asset allocation that’s intended to help you reach a specific goal. Generally, the shorter your timeline, the more conservative your asset allocation because you can afford less risk given the shorter time frame for reaching your goal amount. Similarly, the longer your timeline, the more risk you can afford to take on, so we’ll construct an asset allocation that’s less conservative for you.

What do we mean by conservative?

This describes investment portfolios with greater allocations to investments with lower risk and return profiles, such as bonds; so they may not earn as much as riskier investments, such as equity ETFs, during strong markets; but they’re also less likely to decline as much in a downturn. For example, you’re more likely to find a larger allocation of bond ETFs than equity ETFs in your shorter-term goal portfolios, like buying a home or starting a business.

Remember: Market movements impact different investments differently. And the nature of the market is that over the course of any given time period, some investments will likely be up while others are down. This, combined with the different asset allocations, is why you can see variations in performance across your Ellevest portfolios.

Furthermore, since Ellevest practices goal-based investing, we decided we needed to develop a goal-specific way of defining success. That’s why we created a different way of evaluating how well you’re progressing toward your goal, one that allows you to see how your actions and market movements can impact your likelihood of reaching it. We think it’s a new, more helpful method: that of being on track to reach your goal vs. falling off track.

Looking at Percentages

One of the many ways in which Ellevest differs from some other digital advisors is in the investment plan recommendations we make for helping you to reach your goal amount. Some advisors recommend plans that shoot for a 50% likelihood of achievement, which means that you may reach that goal only half the time. It seems to make sense, but it also could mean you’re just as unlikely to reach your goal as you are likely to reach it. We don’t consider that to be good enough, as you’re probably planning for your future with these financial goals in mind.

That’s why we spent a lot of time talking to women like you to determine what likelihood of achieving your goal would give you peace of mind. And the result? With Ellevest’s personalized portfolios and savings recommendations, you’re likely to reach your goal amount or better in 70% of market scenarios.

On Track vs. Off Track

So long as your likelihood remains at 70%, we consider you to be on track for reaching your goal. It's worth noting that your likelihood can change for a number of reasons. Market fluctuations, which are normal, can cause each of your goals’ likelihoods to move down or up. However, if your likelihood falls to 60% or lower (which still means you’ll reach your goal in the majority of markets), then we consider you off track and recommend steps you can take to help you get back up to 70%.

Just to clarify, being off track doesn’t mean you won’t reach your goal. Ellevest is conservative; from our forecast models that incorporate market downturns at a higher rate than most, to managing your portfolio on our Ellevest Glidepath to become more conservative — if your progress calls for it — as you near your goal date, we like to err on the side of caution. Therefore, when we say you’re “off track,” it simply means that your likelihood of reaching your goal isn’t as high as we’d like it to be.

So there’s no reason to get discouraged if you receive an email from Ellevest alerting you that one of your portfolios is off track. Falling off-track happens, and Ellevest will help you determine the best way to get back on track with actionable tips. These could include making a one-time deposit, increasing your contributions (whether in terms of dollar amount or frequency), and/or lengthening your timeline so you can return to that 70% likelihood. Think of it more as a reminder from your financial FitBit to get up and move every so often so your portfolio stays in the shape you want.

Forecasts or projections of investment outcomes in investment plans are estimates only, based upon numerous assumptions about future capital markets returns and economic factors. As estimates, they are imprecise and hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results.

The information provided should not be relied upon as investment advice or recommendations, does not constitute a solicitation to buy or sell securities and should not be considered specific legal, investment or tax advice.

The information provided does not take into account the specific objectives, financial situation or particular needs of any specific person.

Diversification does not ensure a profit or protect against a loss in a declining market. There is no guarantee that any particular asset allocation or mix of funds will meet your investment objectives or provide you with a given level of income.

Investing entails risk including the possible loss of principal and there is no assurance that the investment will provide positive performance over any period of time.

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